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Dual service tax regime for legal fraternity
March, 07th 2016

Budget 2016 has created confusion in the ranks of the legal fraternity by proposing a dual service tax regime. Senior advocates would now be liable to discharge service tax on forward charge basis. That means, when presenting their bill to a client, senior advocates would add the component of service tax on the value of services. In contrast, the rest of the industry - namely other advocates and law firms - would continue to discharge service tax under the reverse charge mechanism. Under this, the recipient of the service - the client - is liable to bear the tax.

Under forward charge mechanism, senior advocates would be able to claim offset credit for service tax. "This will not be available to law firms," says Sujit Ghosh, partner & national head, Advaita Legal. "The need to enjoy offset credit is much more for law firms given their high establishment costs," adds Ghosh.

The legality of the levy of service tax on legal services is yet to be decided, and the matter is still sub-judice. There has been a spate of litigation since 2011 when the Finance Act sought to expand the scope of the 'legal consultancy service'. Several Bar councils, including the Society of Indian Law Firms, have challenged the levy of service tax on legal services. Legal consultancy service was brought under the ambit of service tax in 2009.

Taxing advocacy:
The story so far

Finance Act, 2009

Introduced the levy of service tax as 'legal consultancy service'
Appearances before any court, tribunal or authority kept outside the ambit
Finance Act, 2011

The scope of 'legal consultancy service' amended to include services provided to any business entity, by any person
Withdrew exemptions given to appearances before any court, tribunal or authority
This became the subject matter of litigation before various high courts in the country. The legality of the levy is still sub judice
In 2012 under a new service tax regime, the recipient of the legal service - the client - was made liable to bear the tax under the reverse charge mechanism
Finance Act, 2016

Proposes to create a dual service tax regime
Senior advocates are now liable to discharge service tax obligations
Law firms and other advocates continue to discharge service tax liability under reverse charge mechanism, whereby the clients pay the tax to the government

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